Now Everyone Thinks The Market's Going To Crash

A month ago, with the market charging ever higher, climbing the
"wall of worry," most bearish voices had been silenced. Now
they're back with a vengeance.

(Why? Because, as we saw clearly at the depths of the market
crash 15 months ago, what most people expect the market will do
in the future is what the market has done in the recent
past. The most recent past is a month in which the market
has fallen more than 10%. So more people are getting
bearish. If the market falls another 30%, people will get
REALLY bearish. And the irony is that, by then, stocks will
actually be attractively priced--much more so than they are
today, and much MUCH more so than they were a month ago, when
everyone loved them.).

In any event,
Brent Arends in the WSJ observes how people are suddenly
paying attention to the bears again. And many of those bears are
predicting there's a lot more pain to come:

Some pretty smart people are cautious. Seth Klarman at Baupost
Group is worried. John Hussman of the Hussman Funds says all
sorts of warning lights have lit up across his screen. Even Ron
Muhlenkamp of the Muhlenkamp Fund, who usually takes a sunnier
view of things, says he has moved a big chunk of his mutual fund
into cash in case there's a plunge.

How far will it go? Mr. Hussman says the technical indicators
have only been this bad 19 times before in the last half century
-- and on average the market plunged about 20% over the following
12 months. When markets were also high, like now, the picture's
even worse.

Ugh.

Too many people have simply assumed that the last 14 months have
been the start of the next boom. But it may have been a typical
"bear-market rally" doomed to fall flat on its face.

That's what stock-market historian Russell Napier says. He thinks
we're in a giant, generational slide that began in 2000 and has
several years still to run...
Keep reading at the WSJ >

Count us among the cautious group. Even after the recent
pullback, stocks are still about 20% overvalued If we get
down to about 900 on the S&P 500, they'll be fairly valued,
but still not cheap.

(Does that mean that this investor has sold everything and is
waiting for stocks to get cheap before buying them again? No. If
I've learned anything over the years it's that the times when you
can be confident enough about the market's future to place a
major bet on a particular outcome are very rare. The
market's high valuation did provide a good opportunity to
rebalance, moving some money out of stocks and into cash, but
especially given the possibility of hyper-inflation on the
horizon, I'd never sell out of stocks completely.

If the big bear market does continue, eventually it will provide
an opportunity to buy stocks when they are cheap, which is always
welcome. Based on the valuation measures I consider
valid--namely Professor Shiller's long-term PE (see chart
above and here)--that would mean prices below 800 on the
S&P. But at this point, after 15+ years of "wildly
overvalued," I'd gladly settle for "fairly valued.")